Getting Approved For a Mortgage: Here’s What You Need

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The desire to own a home is relatively universal, and once you decide it’s time to start looking at homes, a whole plethora of tasks begin to unfold in front of you. The average individual does not have hundreds of thousands of dollars of cash on hand, so the greatest task to tackle is getting approved for a mortgage. While lending companies may be willing to extend credit under certain circumstances, the reality of the situation is that the standards for being approved (quickly) for a mortgage are very high. There are a few things that you will need (and need to be aware of) when applying for a mortgage:

 

Strong & Lengthy Employment History

Lenders feel safer with lending when your recent employment history touts at least a 2 year stint at your most recent place of employment. The longer you’ve been working (and the smaller number of job hops that you have on your resume), the more trustworthy you become to banks.

 

Excellent Credit & Your Credit Reports

This is a bit of a no brainer; your credit score is one of the most important factor when it comes to being approved for a mortgage.  Your FICO score can be in the 620-640 range to be approved for some loan programs, however a  credit score of 720 or higher will lend itself to getting much better interest rates, which can equate to thousands of dollars saved over your lifetime.

 

Make sure to review all three of your credit reports before diving into the mortgage application process. An estimated 40% of credit reports contain errors that could be directly affecting your credit score. Make sure to get all discrepancies fixed as soon as possible.

Money Down & Cash on Hand

It is virtually impossible to get a loan without putting money down. The general rule is to be prepared to put down a minimum of 20% of the mortgage up front. It’s also important to remember that banks and lenders will also be checking your cash on hand. Lenders are weary of mortgage applicants that don’t have a significant enough savings; if a single emergency could clean out your savings, it is unlikely that you will get a mortgage.

 

Misc Important Documents:

  • Records of your employment history for at least 2 years
  • Records of your residence for at least 2 years
  • Proof of Homeowner’s Insurance
  • Pay Stubs from the last 2 months of employment

 

For references and additional resources, please see the following articles: 123

 

What Are The Three Credit Bureaus?

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Most people are familiar with the phrases “credit”, “credit score”, and “credit report”, but few people understand the intricacies of the credit system. The one thing that consumers have trouble understanding is the differences between the three credit reports and the three credit bureaus that produce them. It’s a confusing system for many; each credit report contains information that the other two bureaus do not report on. This is a breakdown of the three reporting bureaus, and the differences between the them:

 

Experian

There are a few things that Experian does differently. They are the only report that specifically reports on-time rent payments (if your rent management company works & reports to Experian RentBureau). The other reports only highlight the times when rent was not paid on time.  Experian also provides “status details” on the items on your report. The status details explains the month and year that an item is scheduled to be removed from your credit report. (Positive payment history stays on for 10 years. Negative items may vary, and Experian takes the guess work out for you.)

 

TransUnion

TransUnion provides the most detailed employment section of the three credit bureaus. Experian and Equifax only provide the employers’ names (and even then, that’s not guaranteed). In stark contrast, TransUnion lists out the employers’ names, the position held at the company, the date that employment commenced. They also provide the opportunity to change and correct any information that is reported incorrectly. The employment information does not factor into the credit score, but it does provide potential lenders information on how long you’ve been with your current employer, and how long you’ve stayed in past positions.

 

Equifax

Both Experian and Equifax list all of the accounts on a credit report together in alphabetical order. Equifax however, separates and lists accounts based on whether they are open or closed. This allows individuals who are not sure about the status of various accounts to easily determine which accounts they need to focus on (in terms of amount of debt, etc.) Equifax also provides information on why particular accounts are closed.

 

For sources, see here and here.

Smartphones: The New Determinant of Creditworthiness

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In developing countries, where banks and banking infrastructures are practically nonexistent, financial institutions are figuring out a way to determine the creditworthiness of individuals in those areas.They are looking at how people use their smartphones.

 

Several startups are working within Kenya, the Philippines, and Indonesia to make the process of lending and borrowing less risky for everyone involved. These are countries where physical banks are few and far between, so the startups are working with potential lenders to develop new ways to assess the risk of potential “lendees”. It’s common that many consumers in these areas have smartphones, even if they do not have bank accounts, so there is a great deal to learn about people through their smartphone usage.

 

Studies have shown that individuals who send more text messages than they receive are perceived to be a risk, because they are not frugal with their time or money. People who make more phone calls in the evening are considered to be a “good risk” because these people are seemingly more aware of their spending (off-peak hour phone calls cost less money).  However, the biggest factor in this smartphone use vs creditworthiness argument is the study of a person’s smartphone payment history. The timeliness of their bill payment is factored in, but there is a heavier observation of other transactions made via smartphone — many people make payments for groceries and personal expenses through their smartphone.

 

This new determination of credit is transformational in a few ways. For one, it’s creating a space for the masses within these countries, to have access to credit where there has never been “credit” before.  This new process is also calling attention to how different the credit systems are around the world. Credit in one country is in most cases useless in other countries because of how different the metrics are. In more established countries, like the United States and The UK, South Africa, and India credit is determined by both positive and negative factors, which aren’t even available or relevant in developing countries. These developing changes in the field of credit are opening up the eyes of international financial institutions; consumer credit may be forced to evolve everywhere to keep up.

 

To see the article that inspired this blog, click here.

Determining Tenant Worthiness

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As a landlord, deciding who will be a good tenant for your property can prove to be and extremely challenging process. There are several key factors in making a tenant decision, but the most important one is determining whether or not the potential renter will be able to consistently pay their rent in a timely fashion.  There are several determination factors to consider when making this final decision (the most important one being their credit score).

 

What is your applicant’s age?

FICO scores vary based on the consumer’s age. When you’re considering younger applicants as renters, it’s important to keep in mind that they may not have enough credit history to possess a higher score.

 

What has impacted the applicant’s score?

Take the time to review the credit report. Some factors that might have negatively impacted a score might not be relevant to you as a landlord (ie: the number of credit inquiries they’ve had.)

 

Is there a guarantor willing to cosign?

Maybe you feel the applicant would be a great fit but their previous credit history isn’t ideal.  Considering a cosigner for the lease, which will provide a backup source of payment if your tenant does not follow through on their payments.

 

Whether you’re a landlord looking to rent your property, or a tenant searching for your next apartment, a person’s credit score is vital to any rental agreement. A landlord will likely infer the worthiness of a potential tenant through their credit score, which shows someone’s financial stability. Ideally, as stated in homeguides.com, a FICO score of 660 and up is the optimal credit score for a potential tenant to a property but can vary based on landlord preference. In a situation where an applicant has poor credit, a landlord might suggest a month to month lease agreement, a higher rental payment, or automatic payments.

 

What is a Credit Score?

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Used as a basis in determination for loans, credit cards and mortgages, credit scores play a vital role in any person’s credentials. Your credit score can literally mean the difference between being approved for a mortgage on your first home and being denied. Credit scores also plays a significant part in determining interest rates.

Your credit score is a generated mathematical algorithm that uses information from your credit report, as depicted on bankrate.com. Although there are various credit score models, most lenders use an applicant’s FICO score to determine their eligibility. According to FICO, “90 percent of all financial institutions in the U.S. use FICO scores in their decision-making process.”

There are 5 primary aspects in determining someone’s credit score: payment history, debts owed, length of credit history, new credit, and types of credit used. Each metric is weighted in different percentages against your score, with payment history and debts owed making up for more than half of your total score. Whether you are new to building credit or have a substantial number of years with credit also works as a factor in your credit score. Those who are new to credit have a different formula used than those who are not. Consumers with similar credit profiles have a formula designed for their category.

Although some lenders may have their own spectrum of what  “a good credit score” is, creditkarma.com suggest a good score is anywhere between 700 and 850. Knowing your credit score is a crucial aspect in planning your financial success. Prior to applying for credit you should always review your score and know where you stand. There are various sites you can visit that specialize in managing your credit score. By doing so you have the opportunity to build your score and make yourself a more favorable applicant, thus setting yourself up for future financial success.